CASE: Economic Conundrums and the Comeback

of Emerging Economies
In the world of globalization, one often struggles to separate Other analysts emphasize the
the hype from reality. Some iew it in the extreme, as in the entry of bilions of people
into the global
transformation ofeverything. Others see it as simply the lat-
marketplace. They reason that the world is
in the "middle of a
est stage in the evolution of the business environment.
two-part revolution. Three billion new
people-bllion and a half Chinese, billion Indians, half a
Despite far-ranging opinions, most agree that the ongoing billion
people from former Soviet bloc-have suddenly come

MAP 4. Leading Emerging Markets, 2008

Source: Compiled from The Economist and the Morgan Stanley Emerging Markets Index.

Arctic Ocean

North
Atlantic
Ocean

Pacific
Ocean

Indian
Ocean
South
Atlantic
Ocean

integration of national economies into the global market has
changed the business environment.
Discussion of the economic environment of globalization
has taken on a far more dramatic tone since 2001. Some
commentators see trends that indicate a flattening of the
World whereby advances in institutions, communications,
and technology fundamentally change the economics of
globalization. They speak of "distributed tools of innovation
and connectivity empowering individuals from anywhere to
compete, connect, and collaborate."
into the global economy all at one time. Within these three
billion people is a population as big as the United States,
bigger than anybody in Europe or Japan, who are every bit
as
skilled and can do anything that could be done in the U.S. or
cents on the
Japan or any of the developed countries for ten
skilled
dollar" The combination of low wages and billions of
and labor in the
Workers changes how we interpret capital
production of goods and services.
Provocative in their own right, these interpretations suggest
globalization
that, in the first years of the twenty-first century,

139
 Frameworks
Environmental

PART 2 Comparative
140
economic orthodoxy. Some say that
and initiated trends that challenge
.

Corn-
has introduced developments one s job, company, future, and even one's co
notcoun
and trends will powerfuly impact
bined, these developments a time where old strateaic
has reached an inflection point, namely, pattens
try. The possibility that globalization need for managers to rethink their understanding of economics
the
are giving way to the new, signals market patterns took uneyno
task is the fact that many long-established xpected
Adding urgency to this a resut, there is now a rash of Du7i
first years of the new century. AS
twists and turns during the
conventional explanation. Among these is performance data n
economic developments that defy
distribution of rewards, income equality, poverty. halana
tion, interest rates, wages, productivity, ance of
that run counter to precedent. More specifically:
payments, and capital flows
Wages: Since 2000, world gross domestic product per capita has grown by an average of 32 percent
a year. If this pace continues, the first decade of the twenty-irst century will see the fastest arouh
average world income in history. At the same time, however, the average real wages of workers are f
or falling around the warld. Workers' share of national income in many countries has fallen to its lowest
level in decades. The fall in real wages is especially confusing given the rising productivity of workere
Historically, wages tended to track average productivity growtn, but now it appears that wages are
decoupling from productivity. In the United States, for instance, worker productivity rose 16.6 percent
from 2000 to 2005 while total compensation for the median worker rose 7.2 percent.
Distribution of rewards: It appears that the middle class bears a disproportionate loss of benefits
relative to the top and bottom sectors of the workforce. Workers in America, Britain, and Germany, at the
bottom as well as at the top, have done better than those in the middle-income group. The real median
wage of college graduates in the United States, for example, has fallen by 6 percent since 2000.
Corporate profits: Around the world, companies are repoting astounding profits, accounting for a
record share of national income. In the United States, corporate profits, as a share of national
income,
increased from 7 percent in mid-2001 to 13 percent in
2007. So, whereas workers' share of national
income has fallen to its lowest level in decades, companies' share of profits has surged to all-time highs.
Capital flows: Presently, the poorer countries of the world are financing the lifestyles of thosein
richer countries. This flow of capital is exactly the opposite of that
predicted by economic theory
Capital should flow from rich countries with abundant capital, such as the United States, to poorer
ones, such as China, where capital is relatively scarce. In doing so, this generates higher returns. Today,
however, borrowing by the United States soaks up more than two-thirds of the combined excess sav-
ings of all the surplus countries in the world. The transfer of wealth from poor countries to the United
States, said one analyst, arguably qualifies as the "biggest foreign-aid program in world history."
Income inequality: While workers are being squeezed, high-wage earners have pocketed ever
bigger portions of gains in personal income. Consequently, income inequality has widened to levels
not seen in
decades, In 2005, the top 1 percent of Americans received their largest share of nationa
incomesince 1928. They owned around 40 percent of America's weath-the highest proportion
since 1929-up from just 20 percent in the 1970s.
ntlation: Despite growing demand for goods as well as rising commodity prices, the average
monthly consumer price inflation rates at the global level rate have
age of close to 25 percent
declined from an annual aver
in industrial
in the early 1990s about percent in 2006. The average inflation rae
to 4
economies have fallen more than 300
percent over the past decade. In developiung
COuntries, the decline has been even steeper. in the
early 1990s, the average inflation rd
developing countries has been around 80
percent; that had declined to 5.4 percent by 2000 a
may fall below 5 percent in 2007.
Savings and borrowing: In the mid-1990s, the poorer countries of the world relied on bor
rowed from their richer
counterparts to finance their growth plans. Now, however, the money
flip-flopped, and they are now exporting capital to growing
savings of poorer countries have n-
and con
Sumption ofí richer countries. For example, in finan
2006, the U.S. savings rate reached its lowest poi Since
1933. That year, it reached a negative 1 percent,
meaning that Americans on average po |they
 CHAPTER 4 The lcIOmic Environnents
Facing Businesses 141

rned and also either borowed or spent part of their savings. In contrast, Iho savings rate in China has
earne
none from almost 20 percent of GDP in 1981 to 30 porcent in 1988 and currently starnds near 50 percent.
nterest rates: Global interest rates are stil historicaly low, despite strong growth and heavy gov-
ernmet borrowing. For example, the Bankof Japan set its interest rates to 0.5 percent in mid-2007,
uD from 0 percent one year earlier. In 2005, then-U.S. Federal Reserve Board Chairman Alan
Greenspan faced what he called a "conundrum" in the international bond market: Yield curves had
inverted whereby long-term yields were below short-term rates.
.Inputprices: The past few years have seen the sharpest rise in commodity prices in history. Prices
for products like copper, nickel, platinum, palladum, gold, siver, corn, sugar, uranium, and other fa
materials have shot up in just five years. Specifically, since 2001, the prices of precious metals and
industrial metals like copper, siliver, and gold have nearly tripled while crude oil, heating oil, and natural
gas prices have risen by more than 700 percent. Stil, the prices of many manufactured goods have
tracked inflation or have even fallen (such as those in the consumer electronics market.

Individually significant, each of these economic factors is part of a larger puzle. Combined, they cre-
ate uncertainty that calls into play assumptions about ecornomic variables and relationships.
The quest to understand where the economic environment might be heading pushes executives to look
at where the world is coming from. Initially, attention turned toward how the world economy had changed
between 1950 and 2000. During this time, the diffusion of democracy and free-market principles encour-
aged growing trade among prominent nations to spill over to include most countries around the world.
However, in terms of helping managers interpret the confusing economic puzzles they face, prece-
dents from this era fell short of providing meaningful explanations. As one analyst suggests, "What this
means for the global economy is that looking at growth rates, economic slack, inflation or monetary con-
ditions in the developed world alone would result in a fairly distorted
picture of the global economy."
As economic trends unfolded, an increasingly dominant scenario
gained attention. This scenario
emphasized the epochal shift in the center of gravity of the global economy. By 2050, four of the six
economies in the worldJapan, China, India, and Russia-will be in
largest
greater Asia. Their growth will likely
create a second tier of powerful economies among their Asian
neighbors, such as South Korea, Indonesia,
Taiwan, Vietnam, and Thailand, that will correspondingly become more prominent.
Athough 2050 may seem far off, these countries are quickly developing economic
foundation for future growth. And although policies that will lay the
in transforming the
extrapolation is always risky, hard data point to their
growing success
global economy. For instance, the combined output of emerging economies reached an
tant milestone: It accounted for more than half of impor-
total world GDP in 2006 (as measured in terms of
power parity). Similarly, their share of world purchasing
exports is now 43 percent, up from 20 percent in 1970, and their
share of the world's
foreign-exchange reserves is now 70 percent, up from net deficits in the mid-1990s.
Analysis of the economic environment in emerging economies
begun. Their ambition to improve infrastructure, increase suggests the revolution has only just
has put into motion what productivity, create jobs, and alleviate poverty
willikely be the biggest economic stimulus in history. The last
similarmagnitude-the Industrial Revolution-involved far fewer transformation of
tion unfolding today covers nearly the entire globe and people in far fewer nations. The revoiu-
involves billions of people. As
See emerging
economies powering, if not expected, analysts
rich countries to steering, global growth. The transfer of the growth baton from
emerging markets shows increasing odds of resetting the
of the economic
environment of nature, and our interpretation,
international
business.
The search for anchors to
guide
say one need only review the last analysis
leads some to seek precedent further back in
millennium to put the current economic drama into history. Some
rOughly 1000 until the mid-1880s, China and
India were the world's two
perspective. From
seam engine and the biggest economies. Before the
power loom drove the transfer of economic
emerging economies dominated world might from Asia to the West, today's
output. However, these countries
spurred by closing borders, forced them to retreat into "temporarily"
nternal failure, lost their lead as
policy was the missed isolationism. The penalty for this
opportunity to participate
in the Industrial Revolution.
PART 2 onmparative Lnvironmental 'raewotks

Markets Make a Comeback

FIGURE 4.1 Emerging accointed tor about BO% of the
China and India,
most notably
ADOt 1,00 years ago, today's emerging economies, econornies stch the United States and Frane
rance
twentieth certury, today's developed
Eobal Pconomit
output. By the market trends sugzest tat errerging economies will
than half of global etonomic output Current
Kenerated more
by 2050
aceount for more than 70% of global economic output TDevelFTmer
en're fuds, 211,1, 1ME i.
Ma:hdi P'arra
A Millemninl Perspretne By Angus
h e INirld I eonemy
I rwi, 1gc, datn repurtrd in /'ur ha tng Puer Patily

90

(60

50

40

30

20

10

1820 1913 1950 2005 2025 2050

1000 1500

Developed Economies Emerging Economies

Reports indicate that in the eight centuries leading up to 1820, today's emerging economies produced
on average, 70 to 80 percent of world output (see Figure 4.1). By 1950, emerging economies' share af
global output had fallen to 40 percent. The ambition of their current economic policies highlights theirinten
tion to return to their historic stature. Since 2001, their annual growth has averaged nearly 7 percent, the
fastest pace in recorded istory; in contrast, the rich economies have growith rates just above 2 percent
The Intemational Monetary Fund (IMF) forecasts that in the next five years emerging economies wil grow
at an average rate of 6.8 percent a year, wihereas the developed economies may hit 2.7 percent. If bcth
groups continue in this way, in 30 years"' time today's emerging economies will complete their comeback
and once again account for more than 70 percent of global output.
The shrinking role of today's leading rich economies, coupled with the accelerating scope of emerging
economies, has begun triggering fundamental shifts in investment, trade, consumption, wealth.
and fiscal and monetary policy. These shifts create
pover
opportunities and challenges for international compa
nies. Put differently, strategic inflection points do not necessarily lead to disaster. Change in the way busi-
ness is conducted creates prospects for players, whether newcomers or incumbents, who are adept at
operating in the new economy. Policymakers, executives, workers, and investors will wreste with making
sense of the shift in the global economic environment.
Therefore, we now turn to specifying the frameworks that will be brought to bear on the
economic environment, identifying the elements that will anchor
analysis and the logic that
managers will use to interpret the results.

Introduction
Earlier chapters looked at how
cultural,political, and legal systems influence a companys
decisions on where and how to do
business
internationally. This chapter completes tn
profile by presenting the perspectives and tools that managers use to
environments. econoe evaluate
The importance of this chapter follows from
the fact that different countries
different levels of economic nave
development, performance, and potential. For instane
 CHAPTER 4 The Economic Environments
Facing Businesses 143

in absolute terms, world economic output more than tripled between 1975 and 2006,
reach illion.
$47 trill In relative terms,
many countries
ina tew cases, some not all. Thus
prospered but some more
thanothers and, estimating the
attractiveness of a
as a place to do business and then, once
country there, making prudent investment
and isions depends on how well
erational decis:
managers understand economic
performance and trends.
When a conmpany wants to do business in another country, it must answer standard
Company managers study
aiestions about wealth, income, stability, poverty, and the like. The dynamic natureof economic environments to
tical and economic events means it also must prepare for new questions. Besides estirnate how trends affect their
nssessing the foreign markets in which they operate, managers also need to monitor performance.
those in which they do not. Globalization connects countries in many ways; changein
ane country likely has economic consequences in other countries. Companies must also
watch economic changes in those countries where they may not operate but where their
ompetitors do. Improving economic pertormance or revised economic policies in a par-
ieular country, such as is happening in Brazil, China, India, and Russia, may unexpect
their rivals' competitiveness.
edly strengthen
Although the pace varies from country to country, national economic environ- A countrYs economic policies
are a leading indicator of
world are continually changing. We have seen over the past decade
ments around the government's goals and its
tremendous change in economic opportunities as more and more countries have
economic planned use of economic tools
adopted the principles and practices of free markets. Indeed, country's
a
and market reforms.
policies give clear indication of the government's goals and the economic tools
a
aim to spot those small changes in a
and market reforms it must adopt. Managers
to have big market impact. Therefore,
country's economic environnment that promise
at processes of economic development and
we conclude this chapter by looking
market transition.
policymakers, Economic development directly
Finally, economic development is a vital topic to citizens, managers, impacts citizens, managers,
of free markets over controlled economies
and institutions. The evident triumph
has spurred countries to unleash ambitious economic programs. To some degree,
policymakers,and institudons.

economic development efforts have helped countries improve their standard of living.
of some countries have fallen short.
Then again, the bold development programs transition and development helps
A fuller of the process of economic
understanding
decisions that benefit their companies, their countries, and
managers make better
the world. direct
of characteristics. Some are
impact of economic change has a variety
Ihe or competitors. Others
exert a subtle
clearly linked to environments, companies,
ultimate performance. Carly Fiorina, CEO of CONCEPT CHECK
nruence on a firm's activities and its of the range of economic factors and rela- In discussing "The Forces Behind
Globalization" in Chapter 1, we
ewlett-Packard in 2001, gave a good sense to Shareholders.
in her Annual Letter explain how aneconomic
Onsups that bear on the international company environment responds to
Specifically, she explained: technology. trade, competition,
n terms of economic growth and stability, 2001 was one of the toughest years on recora, Consumer attitudes, and cross-

in part by the border relationships. Here we

particularly for the 1T [information technologyl industry. Triggered 2001, the U.S. econ- point out that the scope of
the
in Q3 ofcalendar lyear]
pse of the hyper-inflated dot-com sector, business investment, compoundea
Connections among these

$oftened considerably. A dramatic slowdown in into

to
conditions spurs companies
decade.
e cvents of September 11, tipped the United
States its first recession in a the examine them as both
discrete

the world's three leading economies slowed simultaneously for

furst and interdependent factors
H
e 001,
Stnce 1974. The European economy stalled, and Japan siruggled to fgnt aeriato
recessi0n. Information technology spending plummeted. The telecommiunicattons
sectors-were hit espe
facturing industries--two of HP's largest ciustomer on
hard by the global economic slowdown. These factors had a significant 1nipact
HP's fiscal 2001
results
nmary, understanding the economic environments of a country helps manage
e r apprise how developmentsand trends have and will likely affect their compa
performance.
144 PART 2 Comparative Environmental l'iameworks

INTERNATIONAL ECONOMIC ANALYSIS

environments world todav
in the
The World Bank reports 208 discrete economic of more than 30,000.* Inevitabl.
194 countries and 14 other economies with populations
attention and
their investmen
warrant
managers must ask which of those countries and potential of
scheme to assess the pertormance
Untortunately, there is no universal usetul approaches. Still, t
there are many
country's economic environment. Granted,
method:
conditions hamper specifying a universal
indicators that precisely esti
set of economic
1. It's difficult to specify the definitive The distri.
the potential of a country's economy.
mates the performance and predicts but minor
in Brazil a concern
fundamental issue
bution of income, for example, is a
in Sweden.
set of estimators, new challenges emerge
when interpreting their
2. On specifying a
environment.
elements of the economic
relationship with other

Dimensions and Systemic Relationships Figure 4.2, which shows some

Meaningful and social factors in a
of the economic conditions that create unique market, physical,
sense of the challenge. Importantly,
it also suggests a way to solve it.
Research gives
a
country, has isolated important elements of an economic environment. These include
market size, market type, and economic freedom.
factors like income, purchasing power,
This chapter shows that reducing the idea of an economic environment to its elemental

lets us then determine how they shape the market.

components
In addition, Figure 4.2 highlights the importance of applying a systems perspective to
our analyses. That is, the configuration and connection of various elements show that a
other parts of the market. The key to
change in one element in the economy c a n affect
how economic environment works is also a function of making sense
understanding an
of the interactions of the parts with one another.
More precisely, Figure 4.2 suggests managers assess an economic environment of a
Key economic forces include
confident these
.Price stabilicy. country by first looking at meaningful dimensions of its economy. Then,
elements make sense, managers assess their systemic relationship and estimate the path
Capital markets. of transition and potential performance for that country's economy. Managers often
Factor endownents.
adjust their interpretation for risks that might alter current activity or future perfor
Market size.
mance. This chapter follows this scheme. It starts by profiling important features of an
|. Public policy.
economic environment, moves on to types of economic systems, and closes with a look at
processes of economic transitions.

FIGURE 4.2 Economic Factors Affecting International Business Operations

EXTERNAL INFLUENCES OPERATIONS

PHYSICAL AND
SOCIAL FACTORS OBJECTIVES
.Political policies and legal
practices
Cultural factors
Economic forces STRATEGY

Economic analysis Geographic influences

Economic indicators
Economic systems COMPETITIVE
MEANS
.Economic freedom ENVIRONMENT
.Transition to a market
economy
 145
CHAPTER 4 The Economic Environments Facing Businesses

Elements
of the Economic Environment
Managers use different econo measures to assess a country's level of performance
Some may be informal« indicators in a
idiosyncratic exam- country-for
potential.
and of wireless phones or circulation patterns of newspapers. In practice,
ole, thethe number
looking at the monetary value of the total flow
usually begin their analyses by
m a n

services in the economy of nation. They refine this analysis by considering

a g e r s

ofgoodsands
06like growth rates, income distribution, inflation, unemployment, wages, produc-
balance of payments. We now examine these factors.
debt, and the
tivity

GROSS NATIONAL INCOME CONCEPT CHECK

In discussing "Growing Consumer
income (GNI) measures the income generated
both by total domestic Pressures" among the drivers of
national
international production activities of national companies. GNI
Gross

duction as well as the globalization, we report in

produ in the domestic economy plus the net flows of factor income Chapter 1 that worldwide
s the value of all production labor income) from abroad during a one-year period.
consumption grew sifold in the
fei.ch as rents, profits, and value of final goods and services newly produced by
second half of the twentieth
Technically, GNI is the market a Ford sports
century-a trend that will likely
factors of production." So, for example, the value of
domestically owned the of the value of a
accelerate throughout the twenty-
that is built in the United States and portion first century. Here we stress the
ttility vehicle (SUV) counted in the GNI of
in Mexico using U.S. capital and management get importance of such infoTmation
Ford SUV made the value of Japanese Toyota SUV built in for managers of global
States. Conversely, the portion of
a
the United count in the GNI of
capital and management would Companies, who, in order to make
the United States using Japanese economies in the world in a variety of decisions, estimate
lapan, not the
United States. Table 4.1 identifies the 10 largest how much income consumers in
terms of GNI. a market have noW and will
given
have in the future.
measure of economic activity for
a coun-
Product GNI is the broadest
Gross Domestic (GDP)--the total value of al
of GNI is gross domestic product
try. An essential part within a nation's borders over
one year, no matter whether
goods and services produced make the product.°As such, GDP is especially
domestic foreign-owned companies
or
the multinational sector is a signifi-
which the output of
useful for assessing countries in of Irish exports are made by foreign-
cantshare of
activity; for example, almost 90 percent
owned firms.

TABLE 4.I The 10 Largest Economies

by GNI, 2005*

GNI
(US$, millions)
Rank Country
United States
12,912,889
4,976,464
Japan
2,875,640
Germany
United Kingdom 2,272,716
2,269,745
China
2,169,169
France
1,772,942
Italy
1,095,876
Spain
1,052,563
9 Canada
804,967
10 India
the Atlas method, which
smooths exchange rate
Data calculated with a average. price-adjusted
luctuations by using three-year moving
conversion factor.
www.worldbank.org. World Bank develop-
Source: The World Bank, at
2007 by the World
indicators 2005 by World Bank. Copyright
ment of the World Bank in the
format
with permission
Dank. Repoduced Center.
fextbookvia Copyright Clearance
 PART 2 Comparative Environmental Frameworks

Technically, GDP plus the income generated from exports, imports, and the interna-
operations of a nation's companies equals GNI. So both a Ford and a Toyota truck
tional
manufactured in the United States would be counted in U.S. GDP, but the truck made in
Mexico by Ford would not.
The absolute size of GNI reveals a lot about the market opportunity in a country. For
example, Paraguay and Brazil are neighbors in South America. Paraguay had a GDP of
$31 billion in 2006, whereas Brazil clocked in at $943 billion. Consequently, foreign com-
panies are more inclined to build operations in Brazil and then export to Paraguay.

gers improve the usefulness Improving the Power of GNI GNI is

robust estimator of an economy's absolute per-
a
national income (GNI) GNI managers when they compare countries. For
ss

iusting it for the number of

formance. However, can mislead
example, economic powers, like the United States, Japan, and Germany, consistently
e, growth rate, and the cost
claim thetop spots on rankings of countries by GNI. As such, a quick look at these rank
ng in a country.
ings might givetheimpression that these top-ranked countries are far richer than coun-
tries like Ireland or Luxembourg. Therefore, managers improve the usefulness of GNI by
adjusting it for the number of people in a country, growth rate, the local cost of
and economic sustainability.
living,
 CHAPTER 4 The Economic Environments Facing Businesses 147

Per Capita Conversion Managers transform GNI, as well as many other economic
indicators, by the number of people who live in a country. This conversion leads to a per
capita estimator that measures a country's relative performance. Technically, we com-
the GNI of a country and converting it into a standard
pute the per capita GNIby taking
currency-say, the U.S. dollar, at prevailing market rates-and then dividing this sum by

its population.
This, along with other per capita indicators, helps explain an economy's performance
in terms of the number of people who live in that country (see Map 4.2). For example,
for Luxembourg, which ranks
GNI may be low in absolute terms, such as is the case
among the smaller
economies of the world. But Luxembourg ranks first in the world by
GNI per capita.
worldwide GNI per capita was $7,011 in 2005,
Officially, the World Bank reports that scheme orders the
up from $5,500 in
2003. Technically, the World Bank's classification
GNI.
on the basis of their per capita
countries of the world into one of four categories
for the 52 low-income countries is $905 or
Respectively, the cutoffs for GNI per capita
lower-middle countries, $3,596 to $11,115 for the 41 upper-
less, $906 to $3,595 for the 54
the 59 high-income countries.
middle countries, and $11,116 or more for

GNI per Capita, 2006

by World Bank
Income Groupings
High income
($11,116 or more)
Upper-middle income
($3,596- $11,115)
Lower-middle income
($906- $3,595)
Low income
($905 or less)

GNI per Capita, 2006*

(Atlas method and PPP)

Top Ten
GNI (USS)
Ranking Country
Luxemboug
76,040
,530
2. Norway ,230
Switzerland
Deamark ,700
4.
Iceland 50,580
5.
45,580
6. Ireland
United States , 970
7.
3,580
B. Sweden
Netherlands 52,670
9. 40,650
10. Finland

Bottom Ten
GNI (USS)
Ranking Country
940
197. Congo Rep.
960
198. Madagasca 920
199. Yemen Rep.
Sierra Leone
850
200. 830
Guinea-BissJu
203. 830
203. Niger 740
 Comparative Environmental Frameworks
148 PART 2

as
developing coun
and m i d d l e - i n c o m e countries
The World Bank refers to low- eterging countries
many analysts preter
emerging economies). They
in ocomprise the case,
u r opening largest number of countries and highest nu intries,
Case (although, as w e s a w

developed coun
RevieNote of inhabitants in the world. High-income
countries are often called

richer nations, or industrial countries. are

clustered in a few regions
countries
include primarily Japan,
4.2 also shows Australia,
that New Zealand, Canada, the United Statesof
high-income nd
t
Map 5, and
less than
percent. 15
countriespresently account for
Lower-income countriee
Western Europe. High-income 75 percent of
world GNI.
population but
over America and to the De
world's Asia to Africa to South
the world, from report GNI
canitnc
spread throughout small share of the world's GNI and per
apitafig
account for a
Region. They hundreds to low thousands (in U.S. dollars).
ures from the low
of o n e year of activity
and cannot mes
Gross figures are a snapshot
Rate of Change and predicting future eco
indicator. Interpreting present
s u r e the rate
of change in an So, for example, lookine a
rate of
pinpointing the change.
nomic performance requires range in
we find a wide

the countries in terms

of their growth rate for GNI per capita,
between 1998 and 2002, Ireland
w a s the econom
fastest growing
growth. For example, a n n u m . Japan, in contrast, grew by only
more than 8 percent per
in the world, expanding
0.2 percent over that period.
rate also indicates its
economic potential-if GNI grows
Generally, the GNI growth
rate than the population, standards of living are said to be rising
at a higher (or lower) business opportunities. For example.
likely
(or falling). The GNI growth rate highlightseconomies o v e r the past 25 years, averaging
China has been one of the fastest growing
several years. This growth, in turn, has resulted in
high single-digit growth for the past nation has e v e r seen, a rise that has
the swiftest, most extensive rise out of poverty any
attracted immense amounts of foreign investment. In addition, as we saw in our opening

Case case, the so-called comeback of emerging

economies foreshadows accelerating standards
Review rates for a sample of developed and
of living. 4.3
Figure the real
compares GDP growth
Note developing economies.

Purchasing Power Parity comparing markets, often convert the GNI

Managers, when
of their home market. This simple conversion
figure in one nation in terms of the currency
greatly refines economic analysis. Comparing countries in terms of GNI per capita
unit at the prevailing rate to
requires translating each currency into a common currency
trade one currency for another (the so-called exchange rate). So, converting Indian rupees
to U.S. dollars at official exchange rates, we estimate Indian GNI per capita at just over
$700. This gap would suggest tremendous differences between the two countries. Some
managers then might wrongly decide to look no further at the Indian market.
This simple conversion can create a systematic distortion. Exchange rates tell us how
many units of one currency it takes to buy one unit of another-for example, how many
Indian rupees one needs to buy one U.S. dollar. However, exchange rates do not tell us
what that unit of local currency can buy in its home country.
More directly, the calculation of GNI per capita does not consider the differences in
cost of living from one country to another. Instead, it presumes that a dollar of income
in Minneapolis has the same "purchasing power" of a dollar of income in Mumbai (tor
merly, Bombay), even though the cost of living between the United States and India
differs. Consequently, GNI per capita is unable to tell us much about how many goods
and services someone can buy with a unit of income in one country relative to how mucn
someone can buy with a unit of income in another country.
Managers adjust GNI per capita for a particular country in terms of its loci
purchasing power parity (PPP). Technically, PPP is the number of units of a countr
currency required to buy the same amounts of goods and services in the domestic maip
that one unit of income would buy in the other country. Specifically, one calculates
by estimating the value of a universal "basket" of goods (like soap, bread, and clo
and services (like telephone, electricity, and energy) that can be purchased with one u
 CHAPTER 4 The Economic Environments Facing Businesses 149

United States FIGURE 4.3

Britain GDP-Real
Euro countries
Growth Rate
Canada Developed
countries GDP increases from year to year
Australia
Japan partly because a country produces
Cambodia more goods and services and
China partly because prices go up.
Estonia Measuring annual growh against
Venezuela price levels in a designated year
Argentina real GDP-as opposed to nomina
India GDP-keeps prices constant.
Vietnam What's left is annual growth in the
Singapore actual production of goods and
Uruguay services. This conversion, by
Russia
shows
Peru stripping out price effects,
that the economies of developing
Bulgaria countries are growing much faster
Czech Republic
Hong Kong than those of the developed
Saudi Arabia countries.
Rwanda Sources: Central Intelligence Agency
Ghana The World Factbook, at www.cia.gov
(accessed October 12, 2007).
Malaysia
Philippines Developing
COuntries
Indonesia
Poland
Turkey
Korea
Thailand
South Africa
Mexico
Taiwan
Chile
Hungary
Ecuador
Brazil +12 +14
+6 +8 +10

of the GNI per capita in terms of its local

of a country's currency. The resulting estimate with unit of
lets us see what local buy
consumers can one

purchasing power in a country rate comes from comparing a

basket of goods
PPP exchange
income. The most c o m m o n basket in the United States.
and services in a country with an equivalent
States and India. Whereas India's GNI
So let's return to the comparison of the United under
actually,
it is in terms of its local purchasing power, just
per capita in 2007 is $820, terms of relative PPP is higher
in India
5,800. Effectively, then, GNI per capita in the basket
of the lower cost of living. This means
that it costs far less buy
to same

Decause
of goods in India than it does in the United States.
of Switzerland. Because the cost
of living is
Ihe opposite effect occurs in the
case
falls from
States, Switzerland's GNI per capita
gher in Switzerland than in the United
in terms of PPP. On a broader scale,
recall the gap in
450 to $38,610 when expressed and high-income countries
low-income countries ($585)
Cper capita between that low-income coun-
($35 data in terms of PPP, we find
D4). Expressing these income countries decrease to $32,824. Map
4.3 profiles
increase to $2,470 and high-income
es
e COuntries of the world in terms of GNI adjusted for purchasing power.

of in terms per
egree Human Development GNI, including its expression
of
an economy. Some
and development in
Pta,growth rate, and PPP, profiles growth as measured by monetary
focusing on growth only
f nat these indicators, by level of development.
of a country's
ACators, misrepresent the scale and scope at a country's degree
of human
can deal with these c o n c e r n s by looking
d rs social factors-to estimate its current
p m e n t - i n terms of both economic and
 and future economic activity. Jointly considering economic and social indicators
enables managers to more fully measure development in terms of the capabilities and
opportunities that people enjoy.
These conditions might not show up immediately in income or growth figures but
they will ultimately. More specifically, the reasoning goes like this:
The basic purpose of development is to enlarge people's choices. In principle, these choices can
be infinite and can change over time. People often value achievements that do not show up at
all, or not immediately, in income or growth figures: greater access to knowledge, better
nutrition and health services, more secure livelihoods, security against crime and physical
violence, satisfying leisure hours, political and cultural freedoms and sense of participatin
The Human Development index in community activities. The objective of dervelopment is to create an enabling environment
combines indicators of real
purchasing power, education,
for people to enjoy long, healthy, and creative lives.3
Economic indicators certainly identify the potential consumption in a country. >tlt,
and health to give a more

comprehensive measure of their monetary basis risks missing the underlying effects of human development an
economic development capabilities that are, in due course, instrumental in increasing GNI. To that end, managet
 RUSiralia 0,9
25 France 30540
Source: International Monetary Fund
GDP PPP per Capita World Map, at
http://en.wikipedia.org laccessed
October 15, 2007; Word Bank, World
Development Indicators Database, May
2007.

the economic environment in

can complement economic indicators by also analyzing
how well a country does in
terms of the overall quality of life in a country: measuring
rates.
terms of social liberties, life expectancy, and literacy

translated this view into

THE U.N. HuMAN DEVELOPMENT ÎNDEX The United Nations has
the Human Development
its Human Development Report and its principal indicator,
achievements in a country on
Index (HDI)" Specifically, the HDI measures the average
three dimensions:

Longeuity, as measured by life expectancy at birth

measured by the adult literacy rate and the combined primary,
Knowledge, as
ratio
secondary, and tertiary gross enrollment
in PPP for U.S. dollars
Standard ofliving, as measured by GNI per capita expressed
in human development rather
By design, the HDI aims to capture long-term progress
Than short-term changes. Map 4.4 shows
countries' HDI pertormance.

CONCEPT CHECK
After pointing out in Chapter 1
that not all interested
parties
unconditionally support
globalization, in Chapters 2
and 3, we discuss several of the
Cultural and political reasons for
opposition in various quarters.
Here we round out this discussion
by adding that much of this
opposition comes from critics
who charge that too many people
pay too much attention to
economic measures of
performance; to understand
growth, progress, and prosperity
fully, they contend, we should
focus more sharply on "green"
measures of economic
performance.
OTHER PROPOSED INDEXES The United Nations refines the HDI to better assess gender and
poverty in development. Specifically, it proposed the following indexes:
Gender-Related
Development: Adjusts for gender inequalities; measures the inequali
ties between and women in terms of a long and healthy life,
men
knowledge, and
standard of living.
Gender Empowernent: Assesses a woman's opportunities in a country
by looking at
inequalities in political participation and decision making, economic
participation
and decisionmaking, and power over economic resources.
Human Poverty: Estimates the standard of living in a
country by measuring human
deprivations and the denial of choices and opportunities for living a life one has
reason to value.10
Collectively, these indicators improve managers' sense of a country's achievements in
longevity, knowledge, and a decent standard of living.
Green Measures of GNP Growing concern for the
ecological welfare of the world
spurs calls for green measures of GNP. Green economics hold that a
country's economy is
a
component of, and dependent on, the natural world within which it resides. As such
 he FFomn fevelngesent fnde

froari
utrlia
Potand 99%

agan
/nited Stat
tyera 9447
etherant 9947
Firlane 9947
txenbsr 94
4 Astria 9944
yEarare
Franee

Unted fngdnm
9
Span
New/ealan 9 96

the standard measures of GDI and GNP are misleading indicators of a country's long-
term economic health and performance.
More specifically, measuring the quantity of market activity without accounting for
the associated social and ecological costs results in mismeasuring economic performance.
Moreover, ensuring sustainable development requires managers to heed the idea that
economic activity must ultimately "meet the needs ofthe present without compromising
the ability of future generations to meet their own needs." Therefore, green economics
tor a wider view of what qualifies as economic growth and progress in studying a
country's economy.
Presently, there is no consensus on how to adjust GDP for green concerns. Current
candidates include the following:
'Green Net National Product: Calls for measuring GNP to account for the correspond Green measures of gross
ing depletion of natural resources and degradation of the environment (much the national producoon um co gauge
same way a company must depreciate both its tangible and intangible assets in mak- economic performance in cerms

ng a product). The resulting indicator, net national product (NNP), adjusts for the of long-cerm sustainability

depreciation of the country's physical assets.12

Genuine Progress Indicator: This measure starts with the same accounting framework
used to calculate GDP but then adjusts for values assigned to environmental quality
 154 PART 2 Comparative Environmental Frameworks

population health, livelihood security, equity, free time, and educational attainr
It values unpaid voluntary and household work as well as paid work. It also subtrainment
factors such as crime, pollution, and family breakdown. tracts
Gross National Happiness: This measure holds that true development of human sociat
takes place when material and spiritual development occurs side by side, thereby c
plementing and reinforcing each other. It measures the promotion of equitable and a
tainable socioeconomic development, preservation and promotion of cultural vale
sus
conservation of the natural environment, and establishment of good governance. alues,
Happy Planet Index: This idea captures the utilitarian view that most people want
live long and fulfilling lives. Hence the country that does the best is the one thad
allows its citizens to do so while avoiding infringing on the opportunity of futur
are
people, and people in other countries, to do the same.

Features of an Economy
GNI and its variations estimate the absolute and relative income of a country. As such
these data reate powerful, first-order indicators of a country's performance and potential
Managers also study other features of an economy. As we now see, they often study infa
tion, unemployment, debt, income distribution, poverty, and the balance of payments.

INFLATION
Inflation is a measure of the
increase in the cost of living.
A general, sustained rise in prices measured against a standard level of purchasing power is
called inflation. Operationally, we measure inflation by comparing two sets of goods at two
points in time and computing the increase in cost that is not reflected by an increase in the
quality of the good. In mainstream economics, inflation results when aggregate demand
grows faster than aggregate supply-essentially, too many people are trying to buy too few
goods, thereby creating demand that pushes prices up faster than incomes grow. Other theo-
ries, notably the so-called Austrian School of Economics, holds that inflation of overall
is the consequence of an increase in the prices
supply of money by central banking authorities.13
Whatever the explanation, managers watch the rate of inflation
given its influence on
many parts of the economic environment such as interest rates, exchange rates, the cost
of living, general economic confidence, and the
stability of the current political system.4
Inflation and the Cost of Living Consider the
impact of inflation on the cost of living
Rising prices make it more difficult for consumers to buy products unless their incomes
rise at the same or faster
pace. Sometimes this is practically
during periods of rapid or "hyperinflation" (for example, impossible.
in Brazil For example,
in the early 1990s or
Turkmenistan in the mid-1990s), consumers have to
it or else watch it turn worthless. spend their money as fast as they get
More pointedly, in Zimbabwe over the
20 percent per day, and past few years, prices have been rising 1 to
by mid-2007, the inflation rate hit 3,714 percent.
the chairman of the Combined
Harare Residents Assocíatión in Upon reflection,
"There's a surrealism here that's hard to Zimbabwe noted,
have cash, you buy it. If get across to people. If you need something and
you have cash you spend it today, because
to be worth 5 tomorrow ie's going
percent less. Normal horizons don't exist here."15
Certainly, these are extreme cases. Still, history shows that chronic
tially annual inflation rates of 10 to 30 percent, inflation, essen
erodes confidence in a
and spurs people to search for better
ways to store value.
country's currency

Implications of Chronic Inflation Chronic

companies. Neither they nor their customers canhyperinflation
or
has bleak implications for
effectively plan long-term investments,
they have no incentive to save, and ordinary investment
instruments like insurance policies,
pensions, and long-term bonds become speculative. Inflation also puts great
pressure on
 CHAPTER 4 The Economic Environments Facing Businesses 155

to control it. Often, gOvernments try to reduce inflation by raising interest

governme nents
e controls, or imposing protectionist trade policies and cur-
price
Wage and
inistalling

Either alone or together, these measures slow or stop economic growth.

rates,
Controls.
ency
and Problems in Measuring Inflation Finally,the measurement of infla-
Price Inde
mmonplace difficulty-1namely, what a country is measuring when it
tion.highligi

an economic variable.Specifically, price indexes are sensitive to deciísions

nports
srope, the
the formulas by which they are calculated, and other factors decided
their scope,
out
a b o u t

that disseminate them.

agencies
by the
bythe tance, in the United States, the Consumer Price Index (CPI) is the official
F o finflation. In the European Union, it is the Harmonized Index of Consumer
meas
eas 1 C P . The CPI differs from the HICP in two major respects: Pirst, the HICP
ice in its scope and, second, the HICP excludes owner-
i n c l u d e s
the rural population
housing. Consequently, managers must be mindful of the process by which
o c u p i e d ,

economic data.l6
institutions report

UNEMPLOYMENT

a CTDloyment rate is the number of unemployed workers who are seeking employ-
t for pay divided by the total civilian labor force. Countries thatare unable to create
ihs for their citizens create a risky businessenvironment. Generally, people out of work
nd unable to find jobs depress economic growth, create social pressures, and provoke
nolitical uncertainty. AS such, the proportion of unemployed workers in a country shows

how well a country productively uses it human resources.

Some economists suggest managers can refine their assessment by estimating the
mjstryindex.which is the sum of a country's inflation and unemployment ratesi The
higher the sum, the greater the economic misery, and the more likely consumers and
companies will curtail spending and investment.
TUnempioymentis a measure
The Working-Age Population Presently, the wealthier countries of the world are of the number of workers
shrink from
approximately 740 million to
watching their working-age population who want to work but do
690 million people between 2000 and 2025. However, over the same time, the working
age population will increase across poorer countries from about 3 billion to 4 billion peo- not have joos.

ple. In China alone, the population above the age of 16 will grow by 5.5 million annually
on average in the next 20 years. The total population of working-age Chinese will reach
940 million by 2020. Presently, the youth of the world suffer the highest rates of unem
ployment in most countries, with rates twice that of adult (ages 25 to 65) unemployment.
China, for example, sees the age structure of its population creating severe employment
pressure within the next two decades.
Labor Regulation Emerging economies also face challenges from excessive labor regu-
labor laws, little changed
aOn that aggravates unemployment. For example, India's in 1947, make it difficult to lay
Sunce they were enacted after the country's independence times or the economy slows.
employees even if a company's fortunes hit hard
sequently, companies are reluctant to hire workers at the risk of being unable to tire
n e e d be. "[CJompanies think twice, 10 times, before they hire new people,"
manutacturers ot
Plained, the chairman of the Hero Group, one of the world's largest
nexpensive motorcycles.
HLems in Measuring Unemployment Again, as in the case of inflation, measurng
countries IS dittl-
C mber of unemployed workers actually seeking work in various
given various assumptions and exclusions. In the United States, the unemploynetnt
the unemploy-
hens misestimate the impact of the economy on people. Specifically,
Da res indicate how many are not working for pay but seeking employment tor
in ey.donot count the number of people who are actually not working at all, wors

wIthout pay, have stopped lookingfor work, or are working illegaly.

 156 PART 2 Comparative Environmental Frameworks

Moreover, the unemployment rate means different things in different countries.

different social policies and institutional frameworks. given
Some countries, such as E
and Germany, provide generous unemployment protection, whereas other countriee
China, Kenya, or Jordan, offer little to no support. Hece managers must be carof
ul in
evauating the implications of unemployment rates for consumption and growth.
Finally, unemployment estimates throighout many poorer nations routinely undor.
mate the true degree of jobles:iress and, more signilicantly, the productivity of those resti-
work. Many countries in Asia, Africa, and South America face more difficult problewho
because of widespread underemployment. That is, even though officially employed, Der
work only part time, which results in reduced productivity, low incomes, and social une
nease.
DEBT
Debt, the sum total of a government's financial obligations, measures the state's borro
ing from its population, from foreign organizations, from foreign governments, arnd frore
international institutions. The larger the total debt becomes, the more uncertain a
try's economy becomes, both in the present, as interest expenses divert money from mGre
coun
productive uses, and the future, as people worry about the ability of future generatione
to pay back the debt.
Presently, the national debt for many countries is growing. For example, the U.S. national
debt has grown from $1 trillion in 1980 to $94 trillion in
early mid-2008. On a per capita basis
each citizen's share of this debt is about $30,800.40 comparison, the corresponding fa.
just In
ures for Canada's debt are about
$740 billion, resulting in a per capita share of roughly $22,6
Some caution against
emphasizing the absolute amount of debt. Instead, they look
at the size of a nation's debt as a
percentage of its GDP as the best measure of its
ity. Based on this relationship, the national debt of the United States in 2007 is sever
65 percent of its GDP; France is about
just about the same, and Germany comes in at 67 percent
Furthermore, some experts warn that comparing the balance of debt between
not account for inflation, which years does
makes balances from later years
U.S. national debt as a appear larger. Taking the
percentage of nominal GDP (which is not adjusted for inflation
drops it to under 60 percent.
A
country has two types of debt:c Internal and External Debt A
Internal debt results when the country's
debt has two parts: internal and
Internal: Portion of the external
government debt thatis government
Internal deficits occur for any number spends than it collects in revenues.
more
denominated in the country's ofreasons, including when an
tem prevents the
government from imperfect tax sys-
social programs exceed available taxcollecting revenue, when the costs of security and
own
currency and held by
domestic residents. revenues, and when state-owned
deficits. Consequently, every
goverrment enterprises run
External: Debt owed to ter struggles with setting
controlling expenses, improving budget management, and spending priorities, bet-
foreign creditors and
denominated in foreign resulting pressure to revise government refining tax policy. The
create economic uncertainties for policies, in the face of
growing internal debt, can
currency. investors and
External debt results when a companies.
government
Presently, much of the debt burden in low-income borrows money from
foreign lenders.
1980s when high oil countries dates back to the 1970s and
prices pushed countries to borrow a
domestic projects (in the belief that great deal of to fund
or domestic
high prices and export earnings wouldmoney be
programs (in the necessity of offsetting the costs of oil sustained)
interest rates, and low price shocks, high
commodity
Some countries recovered, but prices).
did not. Current
Indebted Poor Countries (HIPC) many programs, such as the Heavly
that have severe external debt
initiative, try to alleviate debt for
the poorest countres
extreme debt has led creditors,
burdens. Growing understanding of the hardship or
mostly
debt obligations. So far, debt reduction
the world's wealthiest
countries, to cancel many
25 of them in Africa, which packages have been approved for 30 countres,
provided $35 billion in debt relief.21
More recently, many countries have
borrowed from international lenders to
their movement to freer markets, a financ
process of economic transition we look at later in tne
 CHAPTER 4 The Economic Environments Facing Businesses 157

Many eountries
eountries that bes but eventually failed then had to
began with this ambition
Many
chapter.
foreign
debt. vernments in countries with high debt burdens, like Liberia and
often slow the rrate of economic growth or else try to borrow more money.
on
rely
Zambia must.
Zambia,
estors monitor debt levels to gauge debt and put pressure on the government
Foreig economic policies.
to
revise its

INCOME DISTRIBUTION

PP, even
GNIorPPP
weighted by the size of the population, can misestimate the relative
when
That is, GNI or PPP per capita reports, on average, how much
nation's citizens:
alth of a tells
ear+is.
me the average person to what because not everyone is average, neither indicator
segments of the population.
what share of income goes is $1.4 trillion, a performance that ranks well in the world.
Income distribution is a
Corxample,Brazil's GNI fractions of
description of the
a

Similarly, its GNI per capita

is nearly
$3,550, a strong regional accomplishment (itsBrazil's
neigh-
population that are at various
over $1,000). However,
Bolivia, report GNI per capita just
hors, like Guyana and looks questionable when we consider that the richest fifth of levels ofincome.
aconomic performance
million people) receive 65
about percent of total income while the
Brazilians (about 35 2.2 percent.4 The situation is worse in countries
Brazilians receive only
n0orest fifth of million people) of the population
over 80 percent (more than 800
Citch as India, where and over 40 percent live on less than $1 per day.
than $2 per day
live on less
particular country
income distribution ina
The Gini Coefficient Managers estimate of inequality in
the
its Gini coefficient.(This
measure degree
assesses the
by examining income
income in a countryJThe more nearly equal country's
a
distribution of family (for example, Finland, with an index of 26.9).
distribution,the lower its Gini coefficient
income distribution, the higher its Gini coefficient
country's
The more unequal a index of 56.7).
with an
(for example, Brazil,
Nations Uneven income distribution is not a

Income Distribution Among Wealthy

has the largest inequality gap between rich
for nations. The United States
problem poorer For example, the top 1 percent receives
other industrialized nations.
and poor compared to is the widest it has been in 70 years.
more income than
the bottom 40 percent; this gap 1 has
the share of income going to the top percent
Furthermore, in the last 20 years, This skewed distribution
decreased for the poorest 40 percent.
increased, but it has of the world's population had
world. In 1960, the wealthiest
20 percent
pattern spans the 45 times i
the 20 percent. This grew to 32 times in 1970,
30 times the income of poorest
richest 1 percent of the pop-
in 2000. In addition, the
1980, 60 times in 1990, and 75 times other words, the
income as the bottom 57 percent-in
ulation of the world gets as much
much income as did the 2.7
billíon poorest people.
0 million richest people received as unrest.
social
economic growth if it fans
Widening inequality can threaten
Rural Income Distribution Similarly
there is a strong relationship
Urban Versus the split between those who livein
urban
Detween skewed income distributions and urban centers of
the booming
areas. For example,
rngs versus thosewho live rural Kong, Shenzhen, and Guangzhou-saw their
in
ld-Such as Beijing, Shanghai,
Hong much as that of the typical
about 3.22 times as
income pass $1,200 in 2006,
PEr
Capita this ratio hitting 4
to 1 by 2020.
forecast rural
ral dweller. Current models that urban income
will be seven times as much as

thermore, China projects Porsche, and

Mercedes-Benz dealerships

So although one sees Lexus,

2020. for transportation.
ein animals
many in rural China still rely on bicycles and impoverished
neing, nation's booming
cities and vast,
income disparities between the
ng undermine social stability
as early as 2010.
unaryside, if not resolved, will in Vietnam is 8.1
elsewhere. The median years of schooling in
rSiuations unfold of urban households
rural residents. And 73 percent
tsidents versus 5.4 for households.
Indi sanitation versus
14 percent ofrural
dCess to adequate
 158 PART 2 Comparative Environmental Fr.ameworks
CONCEPT CHECK
As we suggest in Chapters1
and 3, both income inequality
and poverty should diminish as
intermational business activity
drives greater efficiency through
trade and greater opportunites
through democratization. Here we
reiterate the principle that more
eficient trading relationships and
more productive use of liberated
capital helps create job
opportunities and fosters income
growth among greater segments
of the global population.
There is a growing gap between
the rich and poor in virtually
every country in the world.
A Note on Income Equality Finally, the historical record adds an important perspec
tive to this discussion. Specifically, dramatic income equality is a recent phenomenon
In 2002, Jeffery Sachs of the Earth Institute observed:
The world is more unequal than at any time in world history. There's a basic eason for
that which is that 200 years ago everybody was poor. A relatively small part of the world
achieved what the economists call a modern economic growth. Those countries represent
only about one-sixth of humanity, and five-sixths of humanity is what we call the develop-
ing world. It's the vast majority of the world. The gap can be 100-1, maybe a gap of
$30,000 per person and $300 per person. And that's absolutely astounding to be on the
Same planet and to have that extreme variation in material well-being.25
In sum, managers hone their sense of the economic potential of a country by adjusting
their analyses to reflect the distribution of income. Moreover, managers realize that income
inequality is notjust bad for social justice; it is also bad for economic efficiency. Left to persist,
it can fan crime, corruption, and risks that limit growth and erode stability in an economy.
POVERTY
The distribution of income is important to understand a market's performance and
potential. Still, its reliance on central tendencies in income distributions presumes there
actually is a reasonable income within a country. If not, then this statistic misreads an
economy if unchecked by an assessment of the scale and scope of poverty in a country.
And, as noted above, despite long-running efforts by many groups, organizations, and
institutions, poverty prevails in every part of the world.
What Is Poverty? Poverty has many dimensions. In general terms, it is a condition in
which a person or community is deprived of, or lacks the essentials for, a minimum stan-
dard of well-being and life. These essentials can be
life-sustaining material resources
such as food, safe drinking water, and shelter; they may be social resources such as access
to information, education, health care, and social
status; they may be the opportunity to
develop meaningful connections with other people in society.
This text takes an income perspective in which a
person is defined as being poor
when his or her income is below the threshold considered a minimum to
needs and wants.
satisfy specific
Poverty According to the World Bank The World Bank reports that the world
tion is about 78 percent poor (average PPP income less than popula-
$3,470 annually), 11 percent
middle income, and 11 percent rich
(average PPP income more than $8,000 annually).
However, great attention is paid to more stark assessments of poverty{The World Bank
defines extreme poverty as living on less than $1
per day (PPP) and moderate poverty as less
than $2 per day (PPP)) This standard shows that in
2004, 986 million people lived on less
than $1 a day and some 2.6 billion, or almost half of the
lived on less than $2 a day. developing world's population,
Critics contend that the World Bank's standards
underestimate the ot
poverty. The standard of $1 per day (PPP) does not apply equally to pervasiveness
all regions. The
Economic Commission for Latin America and the Caribbean
for extreme poverty at $2 per (ECLAC) puts the threshold
day, whereas in the United States it is estimated at around
$12 per day. Hence integrating World Bank standards with national definitions ot
poverty suggests that more than 3 billion people, of the 6.45 billion on planet Earth in
early 2008, live in moderate to extreme poverty26
Finally, poverty appears to be growing worldwide. Granted, estimates of the number
of peoplein extreme poverty have fallen
by approximately 200 million since 1990.
However, this reduction has been concentrated in a few countries.
India from the estimates finds that the number of
Excluding China ana
poor people in the world has
increased. More precisely, more than 80 countries had lower per capita GNI at theactuauy
end or
the 1990s than they had at the end of the 1980s.
 CHAPTER 4 The Economic Environments Facing Businesses 159

Poverty and
the Economic Environment Poverty of this scale and scope impacts
environments. oughout the world, people struggle for food, shelter, cloth-
econom
ing, clea watet, and healthservices, to say nothing of safety, security, and education.)
in suffering,
results
utrition, mental illness, death, epidemics, famine, and
Failure rexample, 100 percent of adians have access to clean water, whereas only
war.For hanistan do; per
of the people
in capita dietary protein supply in the
13
percent
s is 121 grams but just 32 grams in Mozambique; the average life expectancy
Unit States
International companies facing such
31 years in Botswana.2
years yet only
is 81 yeai
in Japan deal with eir implications for virtually every feature of the economic
must
situations
of extreme poverty, market systems may not exist, national
In the face
frastructures may not work, criminal behavior may be pervasive, and governments
nvironment.

The
be unable regulate society consistently or adopt prudent economic policies. on
t
may
of orldwide business activity and economic progress ultimately depend
growth
alleviatingpoverty.

in mind the
Potential of the (Despite this daunting gap, managers must keep
Poor
The
example, in 2002, India had just under
fmmense potential of today's poor consumers)For India's
subscribers. By 2006, it had 136 million subscribers.
gov-
15 million mobile phone 2010. Powering the penetration of
500 million phone subscribers by
ernment projects offer the cheapest mobile services in the
mobile phones is the fact that Indian companies
earn attractive profits.
world yet still the US$100 One Laptop per Child
developments with computers (e.g.,
Similar of functional cars priced between US$2,000
automobiles (the development
Proiect) and at poverty as an opportunity. More
dra-
the importance of looking
and $3,000) highlight the world are waiting for a $2 pair
"A billion customers
noted, in
matically, one manager $100 house."28
solar lanterm and a
of eyeglasses, a $10

LABOR COSTS
most sense to locate particular activ-
scrutinize where it makes the
Companies continualy look at cost structures in
environments mean companies
ities. Also, changing
economic
down the road. North
cost structure
five to ten years
as estimate States,
current terms as well made shoes in the United
like Nike, for example, once Thailand,
footwear makers,
American from Taiwan, to the Philippines,
moved production
but over a 30-year span, they for the lowest possible
production costs. Despite
China in the quest to country.
Korea, Vietnam, and structures vary from country
markets, cost
the growing uniformity of many
element of
services, the cost
of labor is a key
and with the dif-
Cost( many goods
For for the best deal
Labor and Total scan the world, looking worker in the
total costs)
Consequently/companies
example, a factory
countrie_ For
low-cost and high-cost wages are in Mexico
Terence bétween costs between $15
and $30 per hour; factory
of the U.S. level."
United States typically are 3 percent
in China, factory wages the cost differentials are also
11 percent of the U.S. level;
about as phone
center employees,
service job to
India
service employees, such by outsourcing a
ror realizes
see the average wage
labor cost savings a company
irKing. The significantly,
current projections
and $0.70 in
d n De as much as 60 percent.
More $1.30 in China,
to a bit over
$25, to about
United States moving
ge in the auto parts, it
calculates that it
Indonesia.
China. A maker of a city of
Auto of workers in Jinzhou,
case of Wonder
Onsider the line employing 20 are $40,000 a
to set up an assembly 20 workers
wages of these
cost
ilion The combined worker or
northeastern China. unionized auto-parts
base pay for
one
in
that's roughly the annual
to the
dsum in the United States. a month
are a ticket
nonunion auto-parts workers of $170 for
O wage
Auto and its top a m e n i t i e s like a refrigerator rents
a tactory job at Wonder than $3.
Dly, without
hotel costs less
middle class. In Jinzhou, a basic apartmentrestaurant of
the city's best zero; saidd
the is almost
meal at turnover
month, and a large much sought
after, and
Asuch s
Auto are
dt Wonder
 PART 2
oductivity measures the
iciencywith which goods and
rvices are produced.
Comparative Environmental Frameworks
Sun Shaohua, 30, a factory line worker who strips copper wires for alternators, "Many
come, but nobody everleaves." Expectedly, companies in other countries see this situe pe
do their comparative cost calculations, and typically opt to open operations in China,
PRODUCTIVITY
Companies refine their interpretation of labors costs by considering productiits
specifically, the amount of output created per unit input used. In terms of labor, Drod
tivity is the quantity produced per person per labor hour. Beginning in the first hal
the 1990s, emerging markets have accelerated global productivity (see Figure 4
China'
has
s sustained
been
performance hasAsia
beenand
notably impressive, and
Eastern
yet productivity grow th
also strong throughout
accelerating in Africa and South America.
is Europe
of showing signa
This level of performance has reversed the productivity differential between
workers
in the richer countries versus those in emerging economies. The Conterence
Board Deps
China's annual productivity growth from 2000 through 2007 at 10.4
percent. In the
United States, productivity grew an average of 2.5
percent a year in the late 1990s and
over 3
percent a year between 2002 and 2004. By 2006, it was 1.4 percent, the lowest in
more than a decade,
despite a strong business cycle. Similarly, the European Union saw
modest productivity gains of only 1.5 percent in 2006.33
The Impact of Technology Most immediately, the
methods and
continuing diffusion of management
technology among many low-cost markets will power further productivity
gains. Productivity worldwide has benefited from a powerful combination of
cal progress, an increasingly technologi-
open global trading system, rising cross-country
flows, and more resilient macroeconomic policy frameworks and financial capital
The forces driving systems.
globalization, as we discussed in Chapter 1, fortify these conditions.
THE BALANCE OF PAYMENTS
A country's balance of
payments (BOP), officially known as the Statement of International
Transactions, is the statement of the balance of a
country's trade and financial transactions
as conducted
by individuals, businesses, and government agencies located in that nation
with the rest of the world over a
specific period (usually one year).
FIGURE 4.4 Global Productivity Performance*
Beginning in 1992, the productivity-growth rate of developing countries
began accelerating.Then, in the 1995-1997 period, it
surpassed that of advanced economies.The IMF estimates that a
advanced economies is largely due to the formers widening productivicy gap between developing countries and
Rates indicate annual percentage increases
improving communications systems and transportation infrastructures.
three-year
as
moving average; output is measured as real GDP divided
Sources: World Bank, World by working-3ge population.
Developmuent Indicators (2006); IME, World Economic and Financial
(accessed October 15, 2007). Surveys (2007), at www.imf.org
- 6
Emerging-market and
developing countries
World
Advanced economies
1990 92 94 96 98 2000 02 -2
04 06
 CHAPTER A The Econonic Environments Facing Businesses 161

Accounts The BOP has two main accounts:

Current and Capital
which tracks all trade activity in merchandise
1hecurrent account,
The capital account, which tracks both loans given to foreigners and loans received

by citizens

of each account.
Table 4.2 lists the components
Thefirst few years of the twenty-first century directed attention toward countries'
sales abroad while imports
Current accounts. Mechanically, exports generate positive
sales domestically. Positive net sales, done simply by exporting more
enerate negative
than importing, results in current account surplus; likewise, importing more than export
current account deficit. Table 4.3 lists the 10 countries with the greatest
ing results in a

surpluses and, likewise, the 10 countries with the greatest current

current account
account deficits.35
all BOP transactions have an offsetting receipt. For
The notion of balance means that
instance, a country might have a surplus in merchandise trade (indicating it is exporting
more than it is importing) but may then report a deficit in another area, such as its invest
ment income. In other words, because the current account and the capital account add up
to the total account, which is necessarily balanced, a deficit in the current account is
an equal surplus in the capital account and vice versa. A deficit
always accompanied by
or surplus in the current account cannot be explained or evaluated without simultaneous
explanation and evaluation of an equal surplus or deficit in the capital account.

BOP and Economic Stability (Managers use the BOP to assess a country's economic
stability. By measuring a country's transactions with the rest of the world, the BOP esti-
mates a country's financial stability in the world market) For example, a deficit in mer-
chandise trade means the supply of that country's currency is increasing throughout the
world, given that its consumers are using it to buy the imports that then cause a trade
deficit. Unless the government revises its economic policies, the market will do so by
proxy and depreciate the value of its currency.

BOP and Company Strategy (Monitoring trends in the BOP gives managers one more Companies monitor the
piece of data in deciding whether or not to do business in a country) More generally, it con- of payments to watch fom

firms the importance of the connection between a company'sstrategy and the implications that could lead to currer
of BOP data to economic activities and government policy. For example, some say the solu- instability or change in

tion to the U.S. deficit would come from faster growth overseas, decline in the value of the government policy.
U.S. dollar, slower growth in consumer spending, and a higher U.S. savings rate. Any orne
of these factors would change important elements of the economic environment ot the
United States as well as trigger change in economic policies in countries around the world.

ABLE 4.2 Components of a Country's Balance of Payments

Current Acount
Value of exports and imports of physical goods, such as oil, grain, or computers (also referredtoas
visible trade)
Receipts and payments for servrices, such as banking or advertising, and other intangible goods, such
4S cOPyrights and cross-border dividend and interest payments (also referred to as invisible trade)

Frvate transfers, such as moneysent home by expatriate workers

Oiicial transfers, such as international aid, on which the government expects no returns

Capital Account
erim capital tlows (i.e., money invested in foreign firms as well as profits made by selling those